How to Account for R&D Tax Credits

R&D tax credits offer all UK businesses, regardless of sector, access to valuable financial support for innovation and help fuel growth to transform their business. It’s an incentive that works by offering a corporation tax relief or a tax refund to qualifying businesses.

R&D Tax Credits and Research and Development Expenditure Credit (RDEC)

The way in which to account for research and development tax credits differs depending on the size of your organisation and the nature of the project being carried out. This is due to the difference in benefits offered by the schemes designed to help SMEs (via the SME R&D Relief) and RDEC which was introduced to help large companies as well as those subcontracted to carry out R&D work for large companies (both large and SMEs). It is likely that you could be eligible to claim under both schemes as long as the R&D credit criteria are met. For further information regarding the two, please refer our Guide to R&D Tax Credits. This can, unfortunately, be a complicated process which is why CapEx Associates provide a dedicated service to assist businesses in their R&D tax credit application and unlock further potential capital.

How to Account for R&D Relief

With a time limit of two years from the tax year to recoup R&D costs, a retrospective claim under both schemes, and a one-year reporting interval for company accounts, your award may likely be received before or after these documents are prepared. Therefore we have set out some guidelines to help you in producing your company accounts. Main Differences to Note Between R&D Tax Credits and RDEC: 

  • R&D credits are recognised below the line in accounts, meaning that they are non-taxable and only affect the tax you pay. This is to be presented in your income statement or profit and loss account as either a corporation tax reduction or credit.
  • Research and Development Expenditure Credit (RDEC) is accounted for as above the line, taxable income in comparison and can increase your profit before tax.

Accounting for SME R&D Tax Credits

Did you know that if your claim is…

  1. Received before finalising your accounts – you can simply include the amount you are awarded into your cooperation tax.
  2. Received after your accounts are finalised – complete a prior year adjustment for the year that the claim was made.

Double Entry Book Keeping for SME R&D Tax Credits

The instructions below lay out how you can successfully account for your SME R&D credits. To account for your pre-R&D tax charge: Debtor – Corporation tax charge (income statement) Creditor – Corporation Tax (balance sheet) To reduce your tax charge to include your R&D claim: Debtor – Corporation Tax (balance sheet) Creditor – Corporation tax charge (income statement) If you have received a tax refund: Debtor – Bank (balance sheet) Creditor – Corporation Tax (balance sheet) Awaiting a tax credit: Debtor – Corporation Tax (balance sheet) Creditor – Corporation tax charge (income statement) Received credit from HMRC: Debtor – Bank (balance sheet)

How to Account for RDEC

As RDEC is a taxable income, there are two ways in which it can be included in your company accounts. One is to regard your claim as other income, whilst the other is to deduct the sum from your R&D expenditure. This may be something that you might wish to consult on with your auditor or accountant. Please note, this example does not demonstrate how you can deduct your claim from your R&D costs and explains the latter. Adding the RDEC: Debtor – Corporation Tax (balance sheet) Debtor – Corporation tax charge (income statement) Creditor – Other income (income statement) You will need to add the pre-tax RDEC value above the line as other income and the tax payable within the tax line of your P+L document, However, if you receive a cash RDEC payment: Debtor – Bank (balance sheet) Creditor – Corporation Tax (balance sheet) If you would like some support with your RDEC or R&D tax credit application, please get in touch via our online enquiry form or call us on 0121 272 0801.

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